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Time Magazine: Royal Dutch Shell: The Diplomats of Oil: Monday, May 9, 1960

Time Magazine 1960

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STORY: The Diplomats of Oil

Along the steaming, mud-covered delta of Africa’s Niger River, bare-chested men labored amid crocodiles and screaming parrots this week to push shafts of steel deep into the earth. On the choppy waters of the Persian Gulf, others perched on a crablike platform and sent a snag-toothed bit boring into the ocean bed. Around the world, hundreds of men labored just as sweatily in 35 other countries — from the pampas of Argentina to the back hills of New Zealand — to probe the earth in an eager quest for the substance that makes the world’s wheels go round: oil.

The men on the Niger, the men in New Zealand’s back hills are all employees of a single company, Royal Dutch/Shell, the world’s second biggest oil company — after Standard Oil (New Jersey) — and by far the most international in scope, organization and spirit. Controlled in partnership by two holding companies, one Dutch (Royal Dutch Petroleum Co.) and one British (Shell Transport & Trading Co., Ltd.), Royal Dutch/Shell is a two-headed creature that owns or partially owns 500 worldwide subsidiaries. Known simply as “Shell” to the public and to the oil industry as “the Group,” it produces 14% of the free world’s oil.

Today the world not only runs on oil, but has so much that it is practically floating in it; so great is the glut that the world has oil reserves enough for 40 years at present consumption rates, even if no more fields are found. Yet never before has the Group — and all the other giants in the industry — searched so widely for oil. Why?

Oil in the Garden. The answer lies in politics and in the great changes that are sweeping over the world of oil. Oil is not only powering the unprecedented industrial growth of the West; it is also putting many an underdeveloped country on wheels for the first time. Today every nation wants its own oil industry and is determined to have it. Mindful of the oil wealth of the Arab sheiks, all countries suddenly see oil as the key that will open to their treasuries the fabulous riches of the Arabian nights.

Every nation is convinced that it has oil — and who can say otherwise? Once abundant in comparatively few areas of the world (e.g., the Middle East, Venezuela, Texas), oil has been discovered in so many places (e.g., Libya, the Sahara, Europe) that there are few the geologist will flatly mark “no.” The Group, after 22 years of searching, has even turned up oil right in its own backyard — two miles from its offices in The Hague, and virtually in the garden of one of its directors.

The scramble for new oil has attracted a swarm of scrappy independent wildcatters — to the great concern of the industry’s giants. The independents are drilling all over the world, cutting prices, moving into long-established markets — thanks to a tanker surplus that provides them with dirt-cheap transport. All told, some 250 companies, many of them either new or making their first ventures abroad, are searching for oil in more than 80 countries.

All of them, looking beyond the present glut, are well aware that oil’s future is even fatter than its current surpluses. The free world’s oil consumption last year jumped by 1,000,000 bbl. a day, is growing at the rate of about 7% a year. In the long view of oilmen, the U.S. restrictions on imports must eventually be relaxed; within 25 years the U.S. will probably have to import about half its oil. To supply the needs of the billion more people who will inhabit the earth by 1980. the supply of energy will have to double — and oil is expected to do most of the job.

Horrible Prospect? Wherever there is hope or promise of oil, the big majors are forced to drill — even when they already have enough oil — in order to protect their huge markets and investments. Since every country wants to use its own oil, saving its foreign currency, each new discovery means the loss of traditional markets for imported oil. France, for example, is already working on favored treatment for its Sahara oil. Though the Group strongly opposes the plan, it is ready for it: it has a 35% interest in France’s Compagnie de Recherches et d’Exploitation de Pétrole, now producing in the Sahara.

The closing of the Suez Canal in 1956 gave the oil-burning world a fright, and the air was filled with dire warnings. But the ultimate consequences have given the Arabs something equally frightening to ponder: Nasser’s actions spurred drilling west of Suez. While Arab oil is still the world’s cheapest and most plentiful (60% of known reserves), many Arabs fear that all the new discoveries threaten to cut their $1 billion-a-year oil income. Beirut’s daily newspaper Al-Hayat concluded that production in the Arab East will fall by 25% or 30% in the next three or four years — “a horrible prospect.”

For the Group and the other major oil companies, the prospect is anything but horrible. It greatly improves their bargaining position. When independent companies first breached the traditional fifty-fifty split with oil-bearing countries three years ago, oil-rich nations — notably Saudi Arabia and Venezuela — took a tougher line with the oil companies on profits. They wanted more controls and hinted at nationalization.

But the oversupply of oil has drowned out such talk. Concessions given up by Aramco in Saudi Arabia have found few other takers; Venezuela faces a 7% drop in oil income this year because private oil companies, hit by a boost in taxes, have cut back their drilling. Fortnight ago, Venezuela set up a new state-owned oil company to drill in areas not yet touched by private firms. But President Rómulo Betancourt emphasized that there is no thought of nationalization. Oil-rich nations have learned a stern economic lesson: it is not enough just to have oil; it must also be marketed.

Sheep’s Eyes & Caviar. Like accomplished diplomats, aware of strengths and weaknesses, oilmen are ready to use their new power to play country against country, hold the line against more liberal profit splits. Among them, no man is more skilled in the art of diplomacy than John Hugo Loudon, the Group’s senior managing director and Shell’s No. 1 man. Says Loudon carefully: “There is a growing awareness in the large exporting countries of the increasing availability of alternative sources of supply. They need to watch that the overall cost of their oil remains competitive.”

At 54, Loudon is handsome, tanned, broad-shouldered (6 ft. 1 in., 180 lbs.), and the very model of the international business diplomat. Loudon (rhymes with howden ) needs to be, for the Group talks business in every major language, has dealings in more than 50 currencies. Sophisticated and charming, he is the friend of desert sheiks and kings, was the only businessman invited to the royal box to meet French President de Gaulle during a gala performance recently at Covent Garden. He speaks five languages fluently (Dutch, English, Spanish, French and German), and can, with equal aplomb, pop a sheep’s eye into his mouth while feasting in an Arab tent or dine royally on caviar and champagne.

Where will the next diplomatic move be made? This week, in a gabled Renaissance building in The Hague, John Loudon and the Group’s other six managing directors gathered with lieutenants to consider the problems of their empire and plot its future. They met in a dark, wood-paneled room far removed from the noise and distractions of the street, settled into plush blue chairs for three days of secret, hard-headed talks. As each man rose to a flower-decked rostrum to say his piece, he was faced with two rows of buttons that controlled a movie screen and 24 separate charts that silently glided down from the ceiling.

Fervent Embrace. The charts showed that the Group’s future has never been brighter. It is building nine refineries to increase its total refining capacity outside North America by 7%. It is participating in seven pipeline projects, including a 24-in. line connecting Shell’s Rotterdam refinery with the Ruhr and a line from the Marseille area to Karlsruhe in West Germany, which will save tankers the long trip around the Continent. The Group has strengthened its position in Mideast oil through a deal with Gulf Oil, will have access over the years to 13 billion bbl. of Kuwait oil. U.S. investment trusts have become conscious of the Group’s potential. Many, after sharply reducing their holdings in U.S. oil companies (now selling at their lowest prices in five years), have made the Group their new favorite.

The Group is strongest where the world’s fastest-growing markets are located. It has the industry’s biggest stake (25%) in the thriving European market and a big head start in newly developing countries.

While oil demand will rise 75% in the U.S. by 1975, it is likely to treble in the rest of the free world. Moreover, the Group has strengthened itself for the rigors of new competition by casting off the remnants of cartelism — long European business’ favorite form of capitalism — and fervently embracing free enterprise. Says John Loudon: “We are second to none in our belief in free enterprise.”

One result of this is a hard-fought contest with its chief rival, massive Jersey Standard. John Loudon diplomatically insists that “this is not a horse race” — but every oilman knows that it is. The Group still lags behind Jersey Standard (1959 sales: $8.7 billion), but it is fast closing the gap. Its annual report, issued this week, shows that its sales climbed to $7.2 billion from last year’s $6.5 billion and its net profits from $444 million to $491 million. While Jersey Standard’s sales grew 5½%, the Group’s sales grew 9%.

The Two Tycoons. The rivalry between Shell and Jersey is an old Shell game. The first great oil tycoon was Jersey Standard’s John D. Rockefeller, but the second was an iron-fisted and energetic Dutchman named Henri (later Sir Henri) Deterding, who joined the Royal Dutch Co. shortly after it was founded in 1890 by Dutch nationals, soon took over as its head.

After Deterding’s arrival, Royal Dutch fended off an attempt by Standard to take over the new company. By his skill and daring in finding oil markets, Deterding built Royal Dutch into an integrated operation, invaded country after country in a battle with Jersey Standard. To gain strength, he merged in 1907 with Britain’s Shell Transport & Trading Co., Ltd., headed by a Londoner named Marcus Samuel, who had switched from importing to the promising field of oil. The two companies kept their separate identities, but adopted for their common symbol the polished sea shell that Samuel had used as his trademark when he was importing shells to grace the boudoirs of Victorian ladies. To assure Dutch control, an agreement was made that four of the seven managing directors be Dutch.*

After the U.S. Government broke up Standard’s U.S. monopoly in 1911, Deterding invaded the U.S. market. He set up the Shell companies that later became Shell Oil, got the oil they needed when Shell discovered California’s rich Signal Hill field. (Today Shell Oil, headed by President H.S.M. Burns, a Scotsman, is the most powerful of all Shell’s subsidiaries; last week it reported 1959 sales of $1.8 billion, up 9% from last year.) After Deterding set up his U.S. plants, he made a shrewd peace treaty with Jersey Standard. Anxious to consolidate his gains and disturbed by the worldwide price wars of the 20s, he persuaded Jersey and British Petroleum (then Anglo-Iranian Oil) to join him in the famous “AsIs” cartel agreement that carved out worldwide markets and quotas. Before he retired in 1937, he had built Royal Dutch/Shell into a billion-dollar business.

During World War II, the Group was probably the hardest hit of any oil company. Bombers battered its European installations, U-boats sank its tankers. The Group got another blow when the U.S. Government forced Jersey Standard to drop all cartel agreements in 1942, thus dissolving the As-Is agreement at a time when the Group’s market positions were left badly exposed. But at war’s end, it rebuilt its damaged installations so fast that Jersey Standard had little chance to cut deeply into the Group’s markets. At first it financed most of its expansion from its own earnings and resources, but turned to world markets as it grew bigger to make it easier to raise cash. Not until 1954 was the Group listed on the New York Stock Exchange.

Primus Inter Pares. Today the Group’s destinies are controlled by Loudon and six other managing directors, who seem for all the world like members of an exclusive club — and so consider themselves. Of a far different stripe than the rough and ready tycoons of the past, they are subdued, cautious, and vastly competent in the modern committee manner. All had to pass one prime admission test: they must have compatibility as well as ability. The man who raises his voice or loses his temper is frowned on, the lone wolf considered a troublemaker. This collective leadership, says one manager, “works like a dream. But to be brutally frank about it, if somebody ever came here who wouldn’t fit in, we’d have our ways of taking care of him.”

In this clubby atmosphere, John Loudon employs the same diplomatic skills to make things run smoothly as he does in the international world of oil. He is no desk pounder, has been known to lose his temper only once. Since the Group has an unwritten rule that decisions are never forced to a vote, Loudon, as the primus inter pares, tactfully arbitrates differences, suggests lines of agreement, sounds out his fellow directors. Four are Dutch: Lykle Schepers, 56, in charge of manufacturing, research, chemicals; Luitzen Brouwer. 49, exploration and production; Arnold Hofland, 59, marketing, personnel and Western Europe; and Loudon. Three are British: John Philip Berkin, 53, the oil coordinator; Harold (“Tim”) Wilkinson. 57, in charge of North America. Far East, Australasia and United Kingdom-Eire; and Frederick Stephens, 56, legal matters and the Middle East, who takes over the chairmanship when Loudon is absent. Shellmen agree that their Britons incline more to flair and intuition, their Dutchmen to patience and stolidity. Loudon presides over the mix. If he favors a project, it is likely to go through; if he frowns on it, its chances are poor. Says he: “There is always plenty of give and take, but somebody always gives in. My job is to see to it that the system works.”

In his elegant, wood-paneled office in the Shell building on London’s St. Helen’s Court (Shell is building an unspectacular-looking 26-story headquarters on the banks of the Thames), Loudon receives a steady flow of international visitors. “This seems to be my American season,” said he last week, after conferring with a stream of U.S. bankers and executives. He logs well over 150 hours of air travel a year, on a recent visit to the Middle East dined with Qatar’s Sheik Ahmed (he thoughtfully brought along a rocking horse for the sheik’s son), conferred with Emperor Haile Selassie in Addis Ababa, was received by the Prime Minister of the Sudan. Says Managing Director Fred Stephens: “You always wonder what kind of visa John will pull out of his pocket.”

Channel Flights. Loudon’s visas add up to a record of accomplishment. In Venezuela, where he was once the Group’s manager, he is credited with persuading the company to become one of the first (along with Créole Petróleum) to adopt the new fifty-fifty profit plan later adopted by the entire oil industry. In Iran, he helped head the international consortium in negotiations in 1954 after Premier Mossadegh nationalized the oil industry. Generally, Loudon prefers to leave most of the on-the-spot negotiating to local managers. Says he: “By comparison, they are certainly more important and have greater responsibility than ambassadors today.” All of them go forth with one ironclad rule from Loudon: “Be a good citizen, obey the laws, but never get mixed up in politics. Never contribute to political campaigns and never pay baksheesh. Never. Never.” He does much of his traveling between London and The Hague, where the Group keeps separate headquarters, flies back and forth in a de Havilland Heron from the Group’s fleet of 60 planes.

In London, he lives in a fashionable Grosvenor Square apartment, walks the first mile to work each day to keep in shape, is picked up by a trailing Bentley for the rest of the trip. He does not like to take work home with him, usually spends his evenings among London’s international set. The pace does not seem to faze Loudon. but his attractive wife has an ulcer. Loudon rarely sends letters, believes that firing off cables is a better way to get attention. One of his favorite sayings: “You can never be too long in a cable or too short in a letter.”

He spends weekends during the summer in his white-brick mansion in a pine forest near Holland’s Haarlem. Called Koekoeks Duin (Cuckoo’s Dune) when Loudon bought it five years ago, it is hung with tapestries and paintings (among them a self-portrait of the young Rembrandt), stocked with old editions, and graced with an icebox liquor cabinet hidden behind a fake bookshelf (Loudon’s drink: Scotch and soda). He is an excellent dancer, likes to golf (in the 90s), spent a week last winter skiing in Switzerland with his wife and two of his sons, Fred, 22, and George, 17. Loudon’s third son, John 24, has followed his father into Shell. (His oldest son was killed in an auto accident in Holland in 1957.)

Policy Changes. John Hugo Loudon was a natural candidate for the Group’s exclusive club. His grandfather was once Governor General of the Dutch East In dies, his uncle Holland’s Foreign Minister in World War I. His father. Hugo Loudon, broke the family’s civil service tradition to study civil engineering, became one of the early pioneers of Royal Dutch and later a managing director and chairman.

After a carefree youth traveling the Continent with his parents. Loudon studied law at Utrecht, and then, despite his father’s urgings that he enter the diplomatic service, joined Shell. He spent 14 months in Venezuela, working on the rigs and derricks of Lake Maracaibo, and then returned to Holland to marry his college sweetheart, Marie van Tuyll, the slim, at tractive daughter of an aristocratic Dutch family. Reassigned to the U.S.. he worked in Boston, Houston (where his two oldest sons were born) and Los Angeles, gradually advancing in the Group’s ranks.

He was sent back to Venezuela in 1938, made assistant manager in Caracas, then general manager for Venezuela (in 1944, when only 38). There he saw nationalistic feelings developing, changed company policy to make it more sympathetic. For his performance in Venezuela, he was picked for the managing directors’ inner sanctum, returned to London in 1947. Put in charge of coordinating the Group’s widespread production and exploration, he guided it through the postwar turmoil and rebuilding. In 1957 he took over leadership of the Group.

Cricket Blues. Today Loudon rules over 250,000 employees spread throughout an empire that includes wells in 17 countries, 47 refineries, the world’s biggest tanker fleet (551 ships), and interests in oil companies in 76 lands. The Group is — due in large part to his efforts — perhaps the most international group in the business world. At the last budget meeting a Swiss reported on manufacturing, a Frenchman on marketing, an American on finance, a Dutchman on exploration and production. The coordinator (a favorite Shell title) was British. Before the war the Group hired only a few foreigners and nationals, picked them chiefly on the basis of “how closely they resembled Europeans.” Most executive positions were held by Europeans on what was called the “old boy” basis. A classic Shell story tells of one frantic cable to London: “Lubrication oil sales dropped 5%. Send two more cricket blues.” In the oil business, Shell had a reputation for hiring slightly snootier, less rough-and-tumble executives.

Loudon anticipated the nationalistic pressures of the postwar era, began pushing for more local nationals in executive spots, and has since turned company policy completely around. The company spends about $7,400,000 a year to develop promising talent in the countries where it operates. It has 60 young executives of 27 nationalities working around the world, frequently cross-posts them (a Filipino to Lebanon, a Moroccan to Indonesia). To help its Middle East salesmen describe their products, it hired Lebanese Poet George Silisty to devise a dictionary of new Arabic terms to suit the modern petroleum industry.

The Group also likes its employees to wear Shell emblems in their buttonholes as symbols of international togetherness. Discrimination is strictly prohibited (though the company, like Aramco, cannot get visas to Arab countries for its Jewish employees). When a British employee in Egypt protested that he did not want to share an office with a newly promoted Egyptian, the local manager snapped: “There’s a tanker leaving tomorrow. You’ll be on it.”

Never was this policy more helpful than in the postwar days of nationalistic upheaval. When Indonesia took out after the Dutch, the Group replaced its Dutchmen on the scene with British and Indonesians. When the British were unpopular in Egypt after Suez. Shell replaced them with Dutch. The British were sent — together with other nationalities — into Tunis, Morocco and Algeria to replace unpopular French employees.

From top to bottom, all of the Group’s executives are carefully rated in the company’s famed “Doomsday Book.” a black book that is kept under lock and key, reviewed by the managing group every six months. The book gives the qualifications and career possibilities for 500-600 top people, plots many careers tentatively all the way through the 1960s, often clearly indicating the executive’s final station. Beside each man’s name are the names of one or more other men who are qualified to replace him. The book abounds in terse comments that may well decide a man’s future: “A typical doman with pronounced leadership ability,” “Sometimes tends to be arrogant.” and “Both he and his wife have the requisite poise on the social side.” The Group likes to have men ready for top leadership by 50 and retired at 60. If a man makes the managing group, he can expect to earn some $140,000 a year.

Awesome Monument. The Doomsday Book is a ready chart for the managerial future, but no guide to what tomorrow’s leadership will face in the fierce battle for markets. Although the Shell combine is only seventh in the U.S., it maintains its overall lead in the fast-growing European market. It has 30% of the British market (Europe’s biggest), has increased its share of the German market from 20% prewar to 25%, managed to hold its 21% share of the French market. But it is running into trouble elsewhere. Its share of the Italian market has dropped from 28% prewar to 22% under strong pressure from such newcomers as the Italian government-owned ENI. In Sweden, it has seen its market plummet from 29% pre war to less than 16%, partly because of the inroads of Russian oil. In Asia, the battle is equally rough. In Japan, the Group is clinging to its 10% share of the market in a pitched battle with eight ma jor competitors, six of them Japanese.

Besides its worldwide facilities and solid markets, the Group has one huge competitive advantage over the rest of the industry. It stepped into chemicals as early as 1928, was far ahead of the field when the postwar boom in petrochemicals came — and has stayed there. With 9% of its sales in chemicals, it is the world’s biggest supplier of agricultural chemicals and insecticides, the biggest detergent maker outside the U.S. Its growth potential is almost unlimited: petrochemicals already account for more than half of the world’s chemicals, and the proportion is expected to rise to 65% by 1965.

The Group has constructed an awesome monument to its chemical leadership in the 1,100-acre, $600 million refinery and chemical complex at Pernis, on the banks of the Nieuwe Maas seaward from Rotterdam. Built almost completely after the war, it is the Group’s biggest industrial enterprise and one of the largest in Europe, handles some 16 million tons of crude oil a year and makes 600 different products. The plant is so highly automated that it is kept going at night by a staff of 500. In a sense, Pernis may be the last monument of its kind. The Group sees a trend to medium-sized refineries, expects the growth in demand — and therefore re fining capacity — to switch from Europe to Africa as the years go by.

Price Cuts? With plenty of competition and the worldwide glut in oil, why doesn’t the price of gas and oil drop? The answer lies in the clubby nature of the oil industry. The majors simply do not believe in price cutting — which directly slashes their profits — and make common cause in avoiding it whenever possible. Their philosophy is that if one company cuts prices broadly, all will have to follow — and no one will end up with a competitive advantage. Says Loudon: “You can’t build your share of the market with price cutting. The way to grow is to build pipelines, service stations, more depots.” The result is that, like the auto and the cigarette industries, oildom’s giants rarely compete on the basis of price. But they insist that they are competitive as well as clubby. “Personally, we may all be the best of friends,” says Shell Managing Director Tim Wilkinson, “but after we say goodbye to each other, we go back to our offices and scrap like hell.” At a time when profit margins are dwindling, one favorite way of hitting a competitor is to make it as expensive as possible for him to move into a new market. In Morocco, an old Shell market that Jersey Standard raided after the war, the Group applied all its efforts to bidding up the price of service station sites to discourage Standard.

The majors deny any collusion in setting gasoline prices, insist that prices are uniform only because they all have access to the same sources of crude, pay roughly the same costs to get oil from the well to the pump. But there are few successful challengers to their dominant price-holding role. Independents occasionally force the majors to lower gasoline prices at the pump, as they did recently in West Germany. But they do not have the world wide refining and marketing facilities for a heavy offensive, often cannot offer customers a sustained flow of oil at the same price. Big customers therefore must depend on the majors for oil — at the majors price. Furthermore, the majors are not above ganging up on an independent that challenges the price pattern, bringing the full weight of their power to bear.

Also arrayed against the consumer — the only one who stands to gain by lower prices — is a whole range of forces with vested interests in keeping up prices. Gasoline at the pump is fair game for a nation seeking revenue; out of the average price of 31¢ per gal. in the U.S., the consumer pays about 10¢ in taxes. Independents in the U.S. — which produces the world’s most costly oil — pressured the Government to impose import quotas to protect them from cheaper foreign oil. Such regulatory groups as the Texas Railroad Commission make a concerted effort to prevent flooded markets by limiting production (a method that has prevented any real oil glut in the U.S.), thus in effect helping to keep up prices. The foreign oil-producing nations frown on price cuts, which nip at oil profits. Venezuela recently stopped three U.S. independents from selling Lake Maracaibo crude at $1.50 to $2 per bbl. when the posted price was $2.50.

But no one is sure how long the industry can hold the price line in the face of the glut and the ambitions of the independents. One veteran Mideast oilman predicts: “Within two years there will either be a cut in production or a big break in prices.”

Not Worried. How long will the oil glut last? At least ten years, say many oilmen, but John Loudon is more optimistic. Says he: “I personally am not worried. Oversupply will straighten itself out in time. People will need more and more oil.” The competitor that no company seems to fear is new forms of energy. Though natural gas will become more and more important, most oil companies are already well represented in that field. Nuclear energy is not expected to be competitive for years. In fact, many oilmen welcome the atom as an eventual source of commercial power. Even in the midst of today’s glut, they profess the fear that the world’s oil resources will not be big enough to do all the jobs the future holds for oil.

* British nationals hold 85% of the shares of Shell Transport and the biggest interest (37.8%) in the combined Group. U.S. interests actually hold more shares in Royal Dutch (27.2%) than the Dutch themselves (24.9%), also hold 18.1% of Shell Transport’s shares.

Copyright © 2006 Time Inc. All rights reserved.

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